When you apply for a home loan, the lender will often offer, or push, a life insurance policy that pays off the loan if you die. Taking it is not a legal requirement. RBI’s directions on responsible business conduct treat “compulsory bundling of another product / service with sale of the requested product / service” as mis-selling, as quoted in IRDAI’s September 2026 consultation paper on distribution reforms (Part 1, p.61). IRDAI itself has now proposed to prohibit compulsory bundling of insurance with loans (Part 1, p.58).
In short
- You can say no. Making a loan conditional on buying insurance is compulsory bundling, which RBI’s directions treat as mis-selling.
- You can choose your own cover. A term plan you already own, or buy from any insurer, can protect the loan instead.
- Lender-arranged cover is usually a group policy with a single premium. Group life policies, including group credit life, still attract 18% GST; individual life policies have been GST-free since 22 September 2025.
- Distributors earn heavily on it. IRDAI estimates effective pay-outs on group credit life at around 45% (Part 2, p.18).
Why lenders push life cover
It protects their loan. If the borrower dies, the insurer pays the outstanding balance to the lender. The family keeps the house without the EMIs.
It is sold at the moment you have least leverage. IRDAI’s paper says group credit life is generally offered “at the point of loan origination, where customers often have limited opportunity to compare products, choose the insurer or negotiate the premium” (Part 2, p.18).
It pays the seller well. Commission on group credit life rose from around 5% in FY23 to around 28% in FY25, and effective pay-outs including other remuneration are estimated at around 45% (Part 2, p.18). The premium is usually a single upfront payment, and lenders often add it to the loan, so you pay interest on it for the loan’s tenure.
When you can decline
- You already have enough term cover. If your term plan’s sum assured covers the outstanding loan plus what your family needs to live on, extra loan cover adds little.
- You would rather buy your own. A level term plan pays your nominee, not the bank, and stays with you if you prepay or move the loan. Our comparison of home loan insurance vs term insurance explains the trade-offs.
- The cost is folded into the loan. Ask what the premium is, what the cover is, and whether it is being financed. If it is, you will pay interest on it.
What to do if a lender insists
- Ask for it in writing. Request written confirmation that the loan will not be disbursed without the insurance. That is the evidence you need for a complaint.
- Escalate. Complain to the lender first, then to the RBI Ombudsman for banks and NBFCs.
- Use the free-look period. If a policy was added without your clear consent, you have 30 days from receiving the policy document to cancel it (IRDAI Master Circular on Life Insurance Products, June 2024).
What IRDAI has proposed
IRDAI’s September 2026 consultation paper proposes that banks and NBFCs may not compulsorily bundle insurance with loans. A lender that wants its loan book insured “may take group policy and pay premium as expense of the institution” (Part 1, p.58). A lender could still offer a lower interest rate if you provide term cover equal to the loan, but only if it shows you the rate with and without cover, does not insist you buy from its partner insurer, and you pay the premium directly “and not out of the loan amount” (Part 1, p.58). Commission on loan-linked term cover sold by lenders would be capped at 2% of a single premium (Part 1, p.52). These are proposals; comments close on 25 October 2026.
FAQs
Can a bank refuse my home loan if I don’t buy its insurance?
Making the loan conditional on buying insurance is compulsory bundling, which RBI’s directions on responsible business conduct treat as mis-selling. Loan approval should rest on your credit profile, income and repayment capacity. If a lender insists, ask for the condition in writing and escalate to the RBI Ombudsman.
Is a term plan a better way to cover a home loan?
For most borrowers, yes. A level term plan sized for the loan plus your family’s income needs pays your nominee, keeps its full cover as the loan shrinks, and stays with you if you move or prepay the loan.
Is there a tax benefit on home loan insurance?
Premium you pay for a life policy on your own life can be deducted under section 123 of the Income-tax Act 2025 (the old section 80C), within the ₹1.5 lakh limit, only if you use the old tax regime. Whether lender-arranged group cover qualifies depends on how the premium is paid; check with the lender. Group cover also carries 18% GST.
Sources: IRDAI, Consultation paper on Distribution Reforms, Part 1 and Part 2 (September 2026); IRDAI, Master Circular on Life Insurance Products (12 June 2024); Department of Financial Services, Insurance GST FAQ.